4/28/2003 @ 9:00AM

Bill Donaldson, Meet Frank Galvin

There is a scene in The Verdict, the great courtroom drama, that comes after a down-and-out lawyer named
Frank
Galvin
Frank Galvin
(played by
Paul
Newman
Paul Newman
) is offered a hefty cash settlement if he agrees to drop his case on behalf of a woman who wound up in a coma after seemingly routine surgery. Galvin needs the money and his buddy urges him to take it and run. But Galvin says he wants to try the case–he wants to help her, he wants to win. His buddy tells him not now: “You won it, Franky,” he says. “When they give you the money, that means you won.”

But Galvin takes his shot and tries the case. But that’s Hollywood–and Wall Street is not Hollywood. In real life, everybody settles.

Today in Washington, Eliot Spitzer, the New York State attorney general, and
William
Donaldson
William Donaldson
, the chairman of the U.S. Securities and Exchange Commission, will hold a news conference to announce their settlement with the major Wall Street brokerage firms that released allegedly misleading research reports during the late 1990s, often as a way to generate investment banking fees.

As a bonus, they will announce deals with two former analysts,
Henry
Blodget
Henry Blodget
of
Merrill Lynch
and
Jack
Grubman
Jack Grubman
of
Salomon Smith Barney
, a unit of
Citigroup
. The settlement is expected to track the terms announced tentatively last December.

As is routine in these matters, the firms will pay money–fines totaling $1.4 billion–but will not admit fault. The individuals will pay fines and “disgorge” a fraction of their gains–$4 million for Blodget, who used to analyze Internet stocks, and $15 million for Grubman, who touted telecom shares. They won’t admit fault either.

This day of reckoning is long coming. But it will leave many investors wondering where they can go to collect their share. The answer is that they will have to file arbitration claims against their brokers or join in class-action lawsuits in federal court. Those private actions will be aided by a third aspect of the firms’ settlements with the SEC and the New York AG. As part of the deal, regulators plan to release documents that seem to show how analysts routinely misled investors by promoting stocks of dubious companies. They will also put some of the fines in a fund for investors, though it’s not clear how it will be paid out.

The difficulty for any individual investor will be matching up his or her particular loss with a given analyst’s particular “deception.” The analysts can always say that their e-mail messages were taken out of context, that they believed–or that investors failed to heed their cautions.

The result will be that most investors will get nothing. This is a fair result in the sense that most investors deserve nothing. Analysts like Grubman and Blodget were not voices in the wilderness. They were not solo acts but part of a mighty chorus saying that Internet and telecom shares would continue to defy gravity. There was a willing suspension of disbelief.

There was no dearth of voices saying that there was nothing underlying the share price gains. Prominent questioners included
Warren
Buffet
Warren Buffet
and Alan Greenspan. It’s probably impossible to say in retrospect whether even the most prominent analyst was leading the charge or simply riding the wave for any particular stock at any given moment. The analysts were all cautious enough to hedge their bets. Blodget, for instance, routinely warned that many–if not most–Internet firms would fail.

They were, they might argue, part of a mass hysteria, and not the cause. Their firms, likewise, can argue that they were only feeding a demand for shares in companies that many believed–because they wanted to believe–would change the world. Who caused it? Everyone and no one. Besides, at the end of the day, neither the SEC, the Justice Department nor New York State wants to be responsible for indicting a major Wall Street firm and risking its demise. The firms know this so the settlement talks become an elaborate game of chicken.

In addition to Salomon Smith Barney, which will pay the largest fine,
Credit Suisse Group
‘s
Credit Suisse First Boston
will pay perhaps $150 million.
Goldman Sachs
,
J.P. Morgan Chase
,
Bear Stearns
,
Morgan Stanley
,
Lehman Brothers Holdings
,
Deutsche Bank
and the
UBS Paine Webber
unit of
UBS
would each pay $50 million. Merrill Lynch agreed to its own $100 million settlement last May. The banks will also agree to reforms in their business practices.

Meanwhile, individual investors will be able to pore over the newly released evidence of wrongdoing. Some will be able to achieve their own settlements with the banks. Perhaps one or two will find their Frank Galvins. Most will suffer their own loss.